| SooperKanoon Citation | sooperkanoon.com/75541 |
| Court | Income Tax Appellate Tribunal ITAT Cochin |
| Decided On | Mar-23-2007 |
| Judge | N B Sankar, R S Padvekar |
| Appellant | ito |
| Respondent | Pulimoottil Silk House |
2. We are taking up the revenue's appeal at the first instance for decision. The first issue which arises for our consideration is whether the Commissioner (Appeals) is justified in deleting the addition made by the assessing officer under Section 43B of the Act in respect of payment of EPF and ESI beyond the due date. It was noticed by the assessing officer that the assessee has not remitted the amount of EPF and ESI within the due date. The assessing officer, therefore, made the disallowance of Rs. 1,42,984 under Section 43B of the Act. The contention of the assessee was that though the said amounts were paid beyond the due date prescribed under the relevant Act, but have been paid well within the due date for filing the return of income. The contention of the assessee was rejected by the assessing officer.
3. The assessee challenged the said addition before the Commissioner (Appeals) and the Commissioner (Appeals) deleted the addition.
4. We have heard the parties. The learned Chartered Accountant for the assessee submitted that an identical issue has come for the consideration of this Tribunal in the case of Keltron Component Complex Ltd. being ITA No. 381 (Coch.)/2003 vide order dated 20-6-2005. He further submitted that the same issue was also considered by the Special Bench of the ITAT in the case of Kwality Milk Foods Ltd. v.Asstt. CIT (2006) 100 ITD 199 (Chennai) (SB). The learned Departmental Representative was fair enough to submit that this issue is covered in favour of the assessee by the decision of this Tribunal as referred to by the learned CA as well as by the Special Bench of Tribunal in the case of Kwality Milk Foods Ltd. (supra).
5. We find that an identical issue had come for the consideration before the Special Bench of the Tribunal in the case of Kwality Milk Foods Ltd. (supra) and the issue before the Hon'ble Special Bench was whether the amendment in proviso to Section 43B by Finance Act, 2003 could be construed to be curative, as such retrospective in nature. The Hon'ble Special Bench has held as under: 34. We have considered the entire conspectus of the case. As per the prescription of Section 43B of the Act, deduction for statutory payments pertaining to labour, taxes, etc. are to be allowed as deductions, if they are actually paid during the financial year.
However, to mitigate the unintended hardship it is stipulated in the proviso that taxes are deemed to have been paid during the financial year even if they are paid by the due date of filing of return. In the case of statutory payment relating to labour, it was sine qua non to make the payment anytime before the last date for payment of labour-related liability. It was represented before the Government that the delayed payment of statutory liability related to labour should be accorded the same treatment as delayed payment of taxes, etc. The deduction if denied in a year could not be claimed in subsequent year. On account of various reasons like postal delay, strikes or long holidays, the payment of employer's contributions to the respective authorities at times delayed even though the payment tendered before the due date. Having regard to this unintended hardship, by the Finance Act, 2003 in the first proviso of Section 43B, the words, brackets and letters referred to in Clause (c) or Clause (d) or Clause (e) or Clause (f) have been omitted and second proviso was also omitted. Legislature removed the differentiation between employee welfare payments and others. Uniform criteria was prescribed for the allowability of the claim. The amendment was made to eliminate unintended consequences that caused undue hardship to the taxpayers. Therefore, amendment in proviso to Section 43B by Finance Act, 2003 was curative in nature. Accordingly, it should be applied retrospectively.
Respectfully following the decision of the Special Bench in the case of Kwality Milk Foods Ltd. (supra), we hold that there is no reason to interfere with the order of the Commissioner (Appeals) on this issue.
Ground Nos. 2 and 3 are dismissed.
6. The next issue is whether the Commissioner (Appeals) is justified in deleting the addition made by the assessing officer on account of depreciation on the car on the reason of personal use. It was noticed by the assessing officer that the assessee has disallowed 1/4th of the car expenses on account of personal use, but at the same time, full depreciation was claimed on the car. The assessing officer was of the opinion that as the assessee has admitted the personal use of the car, disallowance was called for and he made the disallowance of 1/4th of the depreciation claimed and made the corresponding addition to the income of the assessee.
7. The assessee challenged the said addition before the Commissioner (Appeals) and the Commissioner (Appeals) deleted the addition made by the assessing officer. Now, the revenue has challenged the decision of the Commissioner (Appeals) before us.
8. We have heard the parties. The short controversy before us is in respect of the disallowance of depreciation for the reason of personal use of the car. Admittedly, as per the facts on record, the assessee itself has made the disallowance in respect of the expenses on the car on the reason of personal use. As per the provisions of Section 38(2) if assets like building, plant or furniture is not exclusively used by the assessee for the purpose of business, then the assessing officer has been vested with the power to prestrict the depreciation by taking the fair proportionate part thereof. An identical issue had come for the consideration before the Special Bench of the ITAT in the case of Gulati Saree Centre v. Asstt. CIT and it was held that in spite of the concept of block of assets, if the asset is identifiable under the provisions of Section 38(2) a fair proportionate part of the depreciation can be disallowed. On the facts of the present case, the assessee itself has admitted the element of personal use and accordingly, suo motu made the disallowance in respect of the expenses on the car. In our opinion, the assessing officer has rightly made the disallowance of 25 per cent of the depreciation claimed by the assessee. We do not agree with the cryptic reasons given by the Commissioner (Appeals). We, therefore, decide this issue in favour of the revenue. We, accordingly, set aside the order of the Commissioner (Appeals) on this issue and restore the order of the assessing officer.
Ground No. 4 is allowed.
9. The next issue is regarding the addition made by the assessing officer on account of low gross profit and deleted by the Commissioner (Appeals). The assessee is engaged in textile business. The assessee declared total turnover of Rs. 4,25,32,550 and declared the gross profit at 12.75 per cent. The assessing officer was of the opinion that the average gross profit in the textile business is 15 per cent as per the returns of income filed by other dealers. The assessing officer also noted that in the immediate preceding year, the assessee itself has shown the gross profit at 13.55 per cent. The assessing officer, therefore, made addition of Rs. 3,44,285.
10. The assessee challenged the said addition before the Commissioner (Appeals) and the Commissioner (Appeals) deleted the addition made by the assessing officer on account of the declaration of low gross profit.
11. We have heard the rival submissions of the parties. We have also carefully considered the facts as per material placed before us as well as the reasons given by the assessing officer. The assessing officer has stated that the average gross profit rate in the textile business is 15 per cent as per the returns of income filed by the other textile dealers. He has further made the observation that for the ready-made items the profit margin is normally about 30 per cent. We consider it necessary to reproduce here the reasons given by the assessing officer for making the addition for the alleged low gross profit declared by the assessee which are as under: The assessee's business is the biggest textile shop in Thodupuzha.
On a total turnover of Rs. 4,25,32,550, the gross profit shown is only Rs. 54,18,875, which works out to only 12.75 per cent. The average GP rate for textile business is 15 per cent as per the returns of income filed by other textile dealers. In the immediately preceding year, the assessee itself has shown a GP of 13.55 per cent. By letter 9-9-2003 it was requested to explain whether there is any specific reason for the fall in GP rate. The assessee's reply states that there is increase in turnover by more than 10 per cent during the year. It is only by selling at reduced rates that sales could be increased. The assessee is dealing in various textile items including ready made garments, umbrella, mosquito nets, etc. For readymade items the profit margin is normally around 30 per cent.
The assessee is not maintaining stock register. The stock inventory as on the last day of the accounting year produced is also not fully verifiable. On the last day of the accounting year, assessee has debited a sum of Rs. 43,353 towards purchases. There was no voucher for that purchase. However, assessee's representative has subsequently furnished the break up of that amount being interest on delayed payment, packing charges and good returned, etc. These items are also not supported with any evidence. In the audit report, it is stated that "no quantitative particulars have been kept by the assessee as the items dealt with are of innumerable varieties and with cost varying from time to time. Since the assessee's account could not be verified properly, and also the closing stock is not supported with any day-to-day stock book, I am not in a position to accept the book results as admitted. Though the average GP comes to 15 per cent, I adopt only the rate of GP admitted by the assessee in the immediately preceding year. The GP therefore, works out to Rs. 57,63,160. Deducting the GP admitted viz. Rs. 54,18,875, the addition works out to Rs. 3,44,285. This is added to the total income returned.
12. We find force in the argument of the learned CA that the observations and the findings of the assessing officer are not based on any evidence or material, but only general in nature. The assessing officer has also not given any instances for the alleged 15 per cent gross profit in the textile business. The assessing officer should have at least taken pains to give some of the instances which would have supported his case that the gross profit in the textile business is 15 per cent. In our opinion, the findings of the assessing officer are only surmises and without any base. It is well settled principle that no addition can be made only on surmises or presumptions. We are, therefore, of the opinion that the Commissioner (Appeals) has rightly deleted the addition made by the assessing officer for the alleged declaration of low gross profit at Rs. 3,44,285. After giving thoughtful consideration to the reasons of the Commissioner (Appeals), we do not find any reason to interfere with the said findings. We, therefore, confirm the order of the Commissioner (Appeals) on this issue and ground No. 5 filed by the revenue stands dismissed.
13. Now, we turn up to the cross objection filed by the assessee. The only issue which arises for our consideration in the cross objection is the disallowance of remuneration to the partners made by the assessing officer and confirmed by the Commissioner (Appeals). The assessee is a partnership firm which was constituted by the deed of partnership 18-12-1992. The assessing officer examined the deed of partnership more particularly Clauses 6 and 7 and was of the opinion that the quantum of salary to be paid to the partners is not specifically provided in partnership deed. The assessee produced the copy of resolution alleged to be passed by the partners at 4 PM on 31-3-2001 as per which the salary payable to each partner was shown to be restricted to Rs. 48,000. The assessing officer relied on the CBDT Circular No. 739 25-3-1996. The assessing officer was of the opinion that no deduction under Section 40(b)(v) of the Act is admissible in respect of remuneration or salary paid to the working partner unless the partnership deed either specified the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. The assessing officer made the disallowance of Rs. 1,44,000 claimed by the assessee towards the salary to the working partners.
14. The assessee challenged the said disallowance before the Commissioner (Appeals) but did not find favour as the Commissioner (Appeals) confirmed the disallowance made by the assessing officer.
15. We have heard the rival submissions of the parties. The assessee has filed copy of the partnership deed which is placed at pages 32 to 34 of the paper book. Clause No. 6 of the partnership deed provides for salary to the working partners and interest on the capital of the partner which is as under: 6. The net profit of the partnership as provided in Clause 5 above shall be after providing salary to working partners and interest on the capital of the partners as per provisions of the Income Tax Act applicable from time to time. It is expressly provided and agreed to by the partners that the partners shall be eligible for salary and interest on capital only to the extent of profit available in the business. In other words, in the event of the partnership making loss, the partners shall not be eligible for any salary and interest. The salary and interest to partners shall be settled only on ascertaining the profit of the business and at the time of closing the books of account. The partners are at liberty to make withdrawals against salary and interest and such amounts shall be adjusted at the year end.
16. The argument of the learned CA is that Section 40(b) only prescribes the ceiling and conditions for allowabiliy of remuneration to the partner. As per the provisions of Section 40(b), the expenditure in case of a firm relating to the salary, bonus, commission or remuneration paid to any partner is allowable expenditure on fulfilling the following conditions: (ii) It should be authorised by or should in accordance with the terms of deed of partnership, and (iii) If any payment of remuneration to any working partner is authorised by or is in accordance with the terms of the deed of partnership but which relates to any period falling prior to the date of such partnership deed for which such payment was not authorised by or is not in accordance with any earlier partnership deed then that is not allowable.
The learned CA further submitted that as per Clause 6 of the partnership deed, it is an admitted fact that the payment of salary to the working partners is provided. It is not the case of the assessing officer that salary provided is not as per the terms of deed of partnership. It was further argued that as per the Indian Partnership Act, the partnership is created by the contract between the parties and parties are at liberty to determine the terms of their contact. The Income Tax Act does not provide how the partnership should determine the terms in respect of determining the quantum of salary or remuneration agreed to be payable to the working partner but by way of provision of Section 40(b)(v) for allowing the expenditure relating to the salary or remuneration certain mandatory conditions are laid down by the Act, but in those conditions, there is no condition that as far as the quantification of remuneration and salary is concerned, it should be in a particular manner. Once the deed of partnership authorises the payment of remuneration or salary to the working partner and the remuneration or salary provided or paid as per the terms of deed of partnership there is no bar for allowing the same.
17. The learned CA further argued that the assessing officer has placed reliance on the Circular No. 739 25-3-1996 and came to the erroneous conclusion that the said Circular is only applicable for the assessment years 1993-94 to 1996-97. He, therefore, submitted that the beneficial circulars are to be given liberal interpretation.
18. Per contra, the learned Departmental Representative supported the orders of authorities below.
19. We have heard the rival submissions of the parties. The controversy is in respect of the salary or remuneration claimed by the assessee.
There is no controversy that the partners are not working partners. The only grievance of the assessing officer is that quantification of salary is not provided in the deed of partnership. We find force in the argument of the learned CA. Section 40(b) only speaks about the condition in which the remuneration or salary paid to the partner is allowable and the extent to which the same is allowable. On the perusal of the provisions of Section 40(b), it is seen that the partner who is paid remuneration or salary is a working partner. Another condition is that the said payment of remuneration or salary should be authorised by the deed of partnership and the payment also should be in accordance with the deed of partnership. There was some confusion earlier when Section 40(b) was introduced to streamline the assessment of the firm with effect from assessment year 1993-94. There was lot of confusion on the interpretation of Section 40(b). Some representations were made to the CBDT as it is clear from the Circular No. 739 25-3-1996. The CBDT has clarified that on the identical clause adopted by the assessee's in their partnership deeds, liberal view will be taken for the assessment years 1993-94 to 1996-97 and accordingly, the CBDT declared that though there is no clear-cut quantification in respect of the amount of remuneration, the same will be allowed for the assessment years 1993-94 to 1996-97.
20. As far as the facts before us are concerned, the partnership deed has provided the payment of salary to the working partners by stating that the same will be as per the provisions of the Income Tax Act applicable from time to time. It is further provided that the salary and interest to the partners shall be settled only on ascertaining the profit of the business and at the time of closing the books of account.
In our opinion, once the partnership deed has authorised the payment of remuneration or salary to the working partner then the same is allowable as a deduction provided the deduction claimed is in accordance with the terms of deed of partnership. We find that the only grievance of the assessing officer is quantification of the remuneration or salary is not provided in express terms. Moreover, the CBDT vide Circular No. 739 dated 25-3-1996 has taken a liberal approach. In our opinion, there is no reason why the same approach should not be taken for other years. In this case, admittedly, the assessee was providing the remuneration to the working partners based on Clause 6 and the returns filed by the assessee were accepted under Section 143(1) and the assessee's case was selected for scrutiny for the first time in the assessment year 2001-02. We find force in the argument of the learned CA that liberal interpretation should be given to the Circulars which are beneficial in nature. We are, therefore, of the opinion that the assessing officer as well as Commissioner (Appeals) were not justified in rejecting the claim of the assessee.
We, accordingly, set aside the order of the Commissioner (Appeals) on this issue and direct the assessing officer to allow the claim of remuneration in respect of the working partners of the assessee firm.
21. In the result, the revenue's appeal is partly allowed and assessee's cross-objection is allowed.